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PERFORMANCE AUDIT OF THE MICHIGAN HIGHER EDUCATION ASSISTANCE AUTHORITY AND THE MICHIGAN HIGHER EDUCATION STUDENT LOAN AUTHORITY DEPARTMENT OF TREASURY April 1998 27-310-97
PERFORMANCE AUDIT
OF THE
MICHIGAN HIGHER EDUCATION ASSISTANCE AUTHORITYAND THE
MICHIGAN HIGHER EDUCATION STUDENT LOAN AUTHORITY
DEPARTMENT OF TREASURY
April 1998
27-310-97
27-310-97 1
EXECUTIVE DIGEST
MICHIGAN HIGHER EDUCATION
ASSISTANCE AUTHORITY AND MICHIGAN
HIGHER EDUCATION STUDENT LOAN
AUTHORITY
INTRODUCTION This report, issued in April 1998, contains the results of our
performance audit* of the Michigan Higher Education
Assistance Authority (MHEAA) and the Michigan Higher
Education Student Loan Authority (MHESLA), Department
of Treasury.
AUDIT PURPOSE This performance audit was conducted as part of the
constitutional responsibility of the Office of the Auditor
General. Performance audits are conducted on a priority
basis related to the potential for improving effectiveness*
and efficiency* .
BACKGROUND MHEAA was established and prescribed certain powers
and responsibilities by Act 77, P.A. 1960 (Sections
390.951 - 390.961 of the Michigan Compiled Laws). The
Act created MHEAA as a nonprofit authority and as an
agency in the Department of Education. MHEAA is
comprised of 15 members appointed by the Governor and
* See glossary on page 30 for definition.
27-310-97 2
one ex-officio member, the State Treasurer, who serves as
the chairman of MHEAA.
MHESLA was created and organized by Act 222, P.A. 1975
(Sections 390.1151 - 390.1165 of the Michigan Compiled
Laws). The Act states that MHESLA was created as a
public body corporate and politic within the Department of
Education. MHESLA is comprised of the members of
MHEAA, as provided by Section 390.1153 of the Michigan
Compiled Laws.
Effective April 8, 1995, MHEAA and MHESLA were
transferred, pursuant to Executive Order 1995-3 (Executive
Reorganization Order 1995-2), from the Department of
Education to the Department of Treasury.
The objective of the programs operated by MHEAA and
MHESLA is to enhance employability prospects for
Michigan residents by providing equality of access and
freedom of choice to students seeking a postsecondary
education.
MHEAA and MHESLA are comprised of five separate
offices. As of September 30, 1997, MHEAA and MHESLA
had 127.5 full-time equated* employees.
AUDIT OBJECTIVES,
CONCLUSIONS, AND
NOTEWORTHY
ACCOMPLISHMENTS
Audit Objective: To assess the effectiveness and
efficiency of MHEAA's and MHESLA's programs and
contracted services.
Conclusion: We concluded that MHEAA's and
MHESLA's programs and contracted services were
generally performed effectively and efficiently. However,
we noted reportable conditions* involving a continuous
* See glossary on page 30 for definition.
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quality improvement process* , MHEAA program
compliance audits, scholarship and grant awards, loan
discharge controls, and a refund policy (Findings 1 through
5).
Noteworthy Accomplishments: The Office of the
Michigan Guaranty Agency's (MGA's) cooperative effort
with other state student loan guarantors in updating the
Common Manual culminated in its distribution to MGA
clients during fiscal year* 1995-96. The Common Manual
is intended to standardize and streamline student loan
policies and administration. For the first time since student
loan programs began over 30 years ago, all guarantors are
administering the Federal Family Education Loan Program
with a common policy manual.
Audit Objective: To assess MHEAA's and MHESLA's
compliance with State and federal laws and regulations
that could have a material effect on the administration of
their programs.
Conclusion: We concluded that MHEAA and MHESLA
generally operated their programs in compliance with State
and federal laws and regulations that could have a material
effect on the administration of their programs. However, we
noted reportable conditions involving contractor loan
collection procedure compliance and annual report
timeliness (Findings 6 and 7).
AUDIT SCOPE AND
METHODOLOGYOur audit scope was to examine the program and other
records of the Michigan Higher Education Assistance
Authority and the Michigan Higher Education Student Loan
Authority. Our audit was conducted in accordance with
* See glossary on page 30 for definition.
27-310-97 4
Government Auditing Standards issued by the Comptroller
General of the United States and, accordingly, included
such tests of the records and such other auditing
procedures as we considered necessary in the
circumstances.
Both MGA, within MHEAA, and MHESLA have an annual
financial audit* and a biennial Single Audit* performed by a
public accounting firm.
Our methodology included an examination of MHEAA,
MHESLA, and Department records primarily covering fiscal
years 1994-95, 1995-96, and 1996-97.
We surveyed MHEAA and MHESLA programs and
identified potential problem areas; determined which of
these problem areas had the greatest risk and/or potential
to improve the operation of the programs; established audit
objectives that defined these areas; and developed and
performed audit methodologies that resulted in an
assessment of the level of performance or compliance for
each audit objectives.
To accomplish our first objective, we reviewed MHEAA's
and MHESLA's enabling legislation and identified their
responsibilities and program goals* and objectives*. Also,
we analyzed MHEAA's and MHESLA's efforts to develop a
continuous quality improvement process to evaluate the
effectiveness and efficiency of their programs and
contracted services.
To accomplish our second audit objective, we examined
documentation supporting program services provided and
observed program operational practices. We obtained a
* See glossary on page 30 for definition.
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random sample of student financial aid records and
determined the validity of information related to eligibility
for program services. We compared student data
submitted to MHESLA with independent sources to verify
critical information necessary to obtain loans, scholarships,
and grants.
AGENCY RESPONSES
AND PRIOR AUDIT
FOLLOW-UP
Our audit report contains 7 findings and 10 corresponding
recommendations. The agency's preliminary response
indicated that it agreed with 9 of the 10 recommendations.
The agency indicated that it had taken steps to comply with
some of the recommendations.
The Department of Education complied with 17 of the 20
prior audit recommendations included within the scope of
our current audit. The other recommendations are
repeated in this audit report.
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Mr. Douglas B. RobertsState TreasurerTreasury BuildingLansing, Michigan
Dear Mr. Roberts:
This is our report on the performance audit of the Michigan Higher Education Assistance
Authority and the Michigan Higher Education Student Loan Authority, Department of
Treasury.
This report contains our executive digest; description of agency; audit objectives, scope,
and methodology and agency responses and prior audit follow-up; comments, findings,
recommendations, and agency preliminary responses; and a glossary of acronyms and
terms.
Our comments, findings, and recommendations are organized by audit objective. The
agency preliminary responses were taken from the agency's responses subsequent to
our audit fieldwork. The Michigan Compiled Laws and administrative procedures require
that the audited agency develop a formal response within 60 days after release of the
audit report.
We appreciate the courtesy and cooperation extended to us during this audit.
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TABLE OF CONTENTS
MICHIGAN HIGHER EDUCATION ASSISTANCE AUTHORITY
AND THE
MICHIGAN HIGHER EDUCATION STUDENT LOAN AUTHORITY
DEPARTMENT OF TREASURY
INTRODUCTION
Page
Executive Digest 1
Report Letter 7
Description of Agency 11
Audit Objectives, Scope, and Methodology and Agency Responses and Prior Audit Follow-Up 15
COMMENTS, FINDINGS, RECOMMENDATIONS,
AND AGENCY PRELIMINARY RESPONSES
Effectiveness and Efficiency 17
1. Continuous Quality Improvement Process 17
2. MHEAA Program Compliance Audits 19
3. Scholarship and Grant Awards 21
4. Loan Discharge Controls 24
5. Refund Policy 25
Compliance 26
6. Contractor Loan Collection Procedure Compliance 27
7. Annual Report Timeliness 28
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GLOSSARY
Glossary of Acronyms and Terms 30
27-310-97 11
Description of Agency
The Michigan Higher Education Assistance Authority (MHEAA) was established and
prescribed certain powers and responsibilities by Act 77, P.A. 1960 (Sections 390.951 -
390.961 of the Michigan Compiled Laws). The Act created MHEAA as a nonprofit
authority and as an agency in the Department of Education. MHEAA is comprised of
15 members appointed by the Governor and one ex-officio member, the State
Treasurer, who serves as the chairman of MHEAA.
Michigan Higher Education Student Loan Authority (MHESLA) was created and
organized by Act 222, P.A. 1975 (Sections 390.1151 - 390.1165 of the Michigan
Compiled Laws). The Act states that MHESLA was created as a public body corporate
and politic within the Department of Education. MHESLA is comprised of the members
of MHEAA, as provided by Section 390.1153 of the Michigan Compiled Laws.
Effective April 8, 1995, MHEAA and MHESLA were transferred, pursuant to Executive
Order 1995-3 (Executive Reorganization Order 1995-2), from the Department of
Education to the Department of Treasury.
As of September 30, 1997, six full-time equated employees were responsible for the
executive-level operations of MHEAA and MHESLA.
The objective of the programs operated by MHEAA and MHESLA is to enhance
employability prospects for Michigan residents by providing equality of access and
freedom of choice to students seeking a postsecondary education.
MHEAA and MHESLA are comprised of five separate offices:
1. Office of the Michigan Guaranty Agency (MGA) - MHEAA established MGA to
guarantee loans made to eligible students and their parents through financial
institutions approved by MGA. MGA's loan guarantee is designed to encourage
financial institutions to make low-interest, long-term educational loans available.
To accomplish this, MGA administers four loan programs that guarantee (a)
subsidized and unsubsidized federal Stafford Loans; (b) federal Supplemental
Loans for Students (SLS); (c) federal Parent Loans for Undergraduate Students;
27-310-97 12
and (d) federal consolidation loans made by banks, credit unions, savings and
loan associations, insurance companies, and certain federal agencies. There was
no new subsequent guaranty activity in the SLS loan program because of the
elimination of the program on July 1, 1994.
MGA entered into a supplemental guaranty agreement with the federal
government, through which the federal government reinsures the loans
guaranteed by MGA and will provide up to 100% reimbursement, depending on
MGA's default experience as specified in the agreement. Federal reinsurance on
guaranteed loans made on or after October 1, 1993 decreased to a maximum of
98%. MGA's fiscal year 1996-97 default rate was 2.67%, which allowed MGA to
receive 98% reimbursement from the federal government.
MGA guaranteed approximately 92,000 loans with an approximate value of $314.5
million during fiscal year 1996-97. As of September 30, 1997, MGA had
guaranteed approximately 2.2 million student loans with an approximate value of
$5.3 billion since its inception. Of these loans, approximately $2.6 billion were
outstanding as of September 30, 1997.
MGA is self-supporting, financing its operations primarily from investment and fee
income, loan recoveries, and federal administrative cost allowances. For fiscal
year 1996-97, MGA had revenues of approximately $95.7 million and expenses of
approximately $92.4 million. As of September 30, 1997, MGA had 59 full-time
equated employees involved in administering its programs.
2. Office of Student Loan Authority Programs (SLA) - MHESLA established SLA to
provide loans to eligible students attending participating institutions of higher
learning, to provide loans to parents of these students, and to acquire loans made
to eligible students and their parents. To accomplish these responsibilities, SLA
administers the Michigan Direct Student Loan Program, the State Secondary
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Market, and the Michigan Alternative Student Loan (MI-LOAN) Program. The
following chart summarizes the loan program activity:
SLA LOAN PROGRAM ACTIVITY
Loan Program
Number ofLoans Made
DuringFiscal Year
1996-97
Value of LoansMade/AcquiredDuring FiscalYear 1996-97
Number ofLoans Made
Since ProgramInception as of
September 30, 1997
Value of LoansMade/AcquiredSince ProgramInception as of
September 30, 1997
MichiganDirect StudentLoan Program 2,942 $ 18,000,000 226,267 $534,100,000
State SecondaryMarket 64,286 $159,400,000 209,836 $511,500,000
MI-LOANProgram 1,744 $ 9,700,000 7,208 $ 40,100,000
SLA is self-supporting, obtaining capital for financing its student loan programs
through the issuance of tax-exempt and taxable bonds, as provided by Section
390.1154 of the Michigan Compiled Laws. The bonds issued by MHESLA are not
obligations of the State of Michigan. As of September 30, 1997, MHESLA had
approximately $672.9 million in outstanding bond principal. For fiscal year 1996-
97, MHESLA had revenues of approximately $55.3 million and expenses of
approximately $54.2 million. As of September 30, 1997, SLA had 28 full-time
equated employees involved in administering its programs.
3. Office of Scholarships and Grants (OSG) - OSG administers the Michigan
Competitive Scholarship Program, Michigan Tuition Grant Program, Paul Douglas
Teacher Scholarship Program, and the Robert C. Byrd Honors Scholarship
Program. OSG awarded approximately $85.7 million of State appropriations to
more than 60,000 Michigan residents during fiscal year 1996-97. As of September
30, 1997, OSG had awarded over $1.2 billion of State appropriations through more
than 1.1 million awards since its inception.
27-310-97 14
As of September 30, 1997, OSG had 14 full-time equated employees involved in
administering its programs.
4. Office of Support Services and Programs (OSSP) - OSSP administers and
monitors campus-based and other special financial aid programs, including
reviews of institutional practices and documentation for compliance with program
requirements; leads and coordinates outreach and information services; operates
a computerized financial aid search service; and conducts research and policy
analysis activities under the purview of MHEAA and MHESLA. OSSP awarded
financial aid of more than $21.0 million of State appropriations during fiscal year
1996-97.
As of September 30, 1997, OSSP had 7 full-time equated employees involved in
administering its programs.
5. Office of Fiscal Affairs (OFA) - OFA acts as controller and treasurer for MHEAA
and MHESLA. OFA develops and implements accounting and financial policies
and procedures for the areas of accounting and reporting, cash management and
investing, bond financing, audits, and budgeting. OFA directs bond issues and
other financing activities to ensure that MHESLA maintains sufficient capital to
make and acquire student loans.
As of September 30, 1997, OFA had 13.5 full-time equated employees involved in
administering its responsibilities.
27-310-97 15
Audit Objectives, Scope, and Methodology
and Agency Responses and Prior Audit Follow-Up
Audit Objectives
Our performance audit of the Michigan Higher Education Assistance Authority
(MHEAA) and the Michigan Higher Education Student Loan Authority (MHESLA),
Department of Treasury, had the following objectives:
1. To assess the effectiveness and efficiency of MHEAA's and MHESLA's programs
and contracted services.
2. To assess MHEAA's and MHESLA's compliance with State and federal laws and
regulations that could have a material effect on the administration of their programs.
Audit Scope
Our audit scope was to examine the program and other records of the Michigan Higher
Education Assistance Authority and the Michigan Higher Education Student Loan
Authority. Our audit was conducted in accordance with Government Auditing
Standards issued by the Comptroller General of the United States and, accordingly,
included such tests of the records and such other auditing procedures as we
considered necessary in the circumstances.
Both the Office of the Michigan Guaranty Agency, within MHEAA, and MHESLA have
an annual financial audit and a biennial Single Audit performed by a public accounting
firm.
Audit Methodology
Our work was performed between April and October 1997 and included an examination
of MHEAA, MHESLA, and Department records primarily covering fiscal years 1994-95,
1995-96, and 1996-97.
We surveyed MHEAA and MHESLA programs and identified potential problem areas;
determined which of these problem areas had the greatest risk and/or potential to
improve the operation of the programs; established audit objectives that defined these
27-310-97 16
areas; and developed and performed audit methodologies that resulted in an
assessment of the level of performance or compliance for each audit objectives.
To accomplish our first audit objective, we reviewed MHEAA's and MHESLA's enabling
legislation and identified their responsibilities and program goals and objectives. Also,
we analyzed MHEAA and MHESLA efforts to develop a continuous quality improvement
process to evaluate the effectiveness and efficiency of their programs and contracted
services.
To accomplish our second audit objective, we examined documentation supporting
program services provided and observed program operational practices. We obtained a
random sample of student financial aid records and determined the validity of information
related to eligibility for program services. We compared student data submitted to
MHESLA to independent sources to verify critical information necessary to obtain loans,
scholarships, and grants.
Agency Responses and Prior Audit Follow-Up
Our audit report contains 7 findings and 10 corresponding recommendations. The
agency's preliminary response indicated that it agreed with 9 of the 10
recommendations. The agency indicated that it had taken steps to comply with some of
the recommendations.
The agency preliminary response which follows each recommendation in our report
was taken from the agency's written comments and oral discussion subsequent to our
audit fieldwork. Section 18.1462 of the Michigan Compiled Laws and Department of
Management and Budget Administrative Guide procedure 1280.02 require the
Department of Treasury to develop a formal response to our audit findings and
recommendations within 60 days after release of the audit report.
The Department of Education complied with 17 of the 20 prior audit recommendations
included within the scope of our current audit. The other recommendations are
repeated in this audit report.
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COMMENTS, FINDINGS, RECOMMENDATIONS,
AND AGENCY PRELIMINARY RESPONSES
EFFECTIVENESS AND EFFICIENCY
COMMENT
Audit Objective: To assess the effectiveness and efficiency of the Michigan Higher
Education Assistance Authority's (MHEAA's) and the Michigan Higher Education Student
Loan Authority's (MHESLA's) programs and contracted services.
Conclusion: We concluded that MHEAA's and MHESLA's programs and contracted
services were generally performed effectively and efficiently. However, we noted
reportable conditions involving a continuous quality improvement process, MHEAA
program compliance audits, scholarships and grant awards, loan discharge controls,
and a refund policy.
Noteworthy Accomplishments: The Office of Michigan Guaranty Agency's (MGA's)
cooperative effort with other state student loan guarantors in updating the Common
Manual culminated in its distribution to MGA clients during fiscal year 1995-96. The
Common Manual is intended to standardize and streamline student loan policies and
administration. For the first time since student loan programs began over 30 years
ago, all guarantors are administering the Federal Family Education Loan Program with
a common policy manual.
FINDING
1. Continuous Quality Improvement Process
MHEAA and MHESLA (the Authorities) had not established a continuous quality
improvement process to evaluate and improve the effectiveness of their programs.
The objective of the Authorities' programs is to enhance the employability
prospects for Michigan residents by providing equality of access and freedom of
choice to students seeking a postsecondary education. The Authorities' ability to
determine the effectiveness of their programs is important because of the size of
the programs and their impact on program participants. During fiscal year 1996-
27-310-97 18
97, the Authorities' programs distributed in excess of $438.8 million through more
than 271,000 loans, grants, and scholarships to students.
Developing a continuous quality improvement process to evaluate program
performance is critical to ensure that the Authorities use their funds most
effectively and to allow the Authorities to identify and make needed program
revisions.
A continuous quality improvement process should include the following elements:
performance indicators* for measuring outputs* and/or outcomes* ; performance
standards* or goals that describe the desired level of outcomes; a management
information system to gather accurate performance data; a comparison of
performance data to desired outputs and/or outcomes; procedures to report the
comparison results to management; and procedures to propose program changes
to improve effectiveness.
We acknowledge that the Authorities have developed some performance
indicators for measuring outputs and that they have established a management
information system to gather performance data. However, the Authorities need to
do more to develop the other elements of a continuous quality improvement
process. For example, we noted little evidence that the Authorities had
established measurable outcome related goals. Consequently, the Authorities
could not demonstrate the success of their programs by measuring the progress
toward achieving program goals.
RECOMMENDATION
We recommend that the Authorities establish a continuous quality improvement
process to evaluate and improve the effectiveness of their programs.
* See glossary on page 30 for definition.
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AGENCY PRELIMINARY RESPONSE
The Authorities agree that they have not established formal performance
standards and measurable program performance criteria; however, they disagree
with the recommendation that they do not have an established continuous quality
improvement process.
FINDING
2. MHEAA Program Compliance Audits
MHEAA had not conducted compliance audits at colleges and universities to
determine that these institutions properly administered and monitored the
competitive scholarship and tuition grant programs. Also, during fiscal year 1994-
95, MHEAA discontinued conducting audits of Office of Support Services and
Programs' (OSSP's) financial aid programs at colleges and universities for
compliance with State laws and regulations.
During fiscal year 1996-97, MHEAA distributed approximately $87.0 million in
financial aid to students through various financial aid programs offered at 96
eligible colleges and universities in the State. MHEAA's responsibilities for
administering these financial aid programs included periodically performing
compliance audits of colleges' and universities' administration of the financial aid
programs for compliance with State laws and regulations. MHEAA has accepted
and recognized its responsibility to conduct compliance audits by establishing a
review position; developing program compliance audit procedures for its campus-
based programs; and by requesting funds, for several fiscal years, to fill a position
to audit competitive scholarship and tuition grants.
Annual State-funded financial aid program appropriations acts also have required
the Office of the Auditor General to conduct annual audits of a limited sample of
private colleges for the purpose of evaluating the effectiveness of each college's
existing internal control structure* . Our last three annual compliance audits of
private colleges indicated weaknesses in the colleges' internal control structures
* See glossary on page 30 for definition.
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over student eligibility for State-funded financial aid programs. Compliance audits
by MHEAA are a necessary part of the internal control structure as proven by the
high frequency of exceptions disclosed by our audits.
MHEAA distributed program operational manuals to each eligible college and
university participating in its financial aid programs. Colleges and universities are
to use these manuals to help them administer and monitor their financial aid
programs in compliance with State law. MHEAA relies on colleges and
universities to monitor and report changes to student program eligibility throughout
the school year. In addition, MHEAA uses other data provided by colleges and
universities, such as enrollment and academic progress reports, to determine that
students, colleges, and universities meet applicable program requirements.
Performing compliance audits of colleges' and universities' State-funded financial
aid programs would allow MHEAA to ensure college and university compliance
with applicable laws and regulations.
We reported this same condition in our prior audit report. MHEAA responded that
it concurred with our related recommendation and had initiated efforts to establish
program audits consistent with available resources.
RECOMMENDATIONS
WE AGAIN RECOMMEND THAT MHEAA CONDUCT COMPLIANCE AUDITS AT
COLLEGES AND UNIVERSITIES TO DETERMINE THAT THESE INSTITUTIONS
PROPERLY ADMINISTER AND MONITOR THE COMPETITIVE SCHOLARSHIP
AND TUITION GRANT PROGRAMS.
WE ALSO AGAIN RECOMMEND THAT MHEAA REINSTATE ITS AUDITS OF
OSSP's FINANCIAL AID PROGRAMS AT COLLEGES AND UNIVERSITIES FOR
COMPLIANCE WITH STATE LAWS AND REGULATIONS.
AGENCY PRELIMINARY RESPONSE
While MHEAA has agreed in the past on the need to begin an audit process, State
funding necessary to provide the staffing for this process has not been provided.
MHEAA agrees with the first recommendation and will seek funding to comply with
27-310-97 21
it. MHEAA also agrees with the second recommendation and will reinstate
program reviews of the colleges and universities participating in the programs
administered by OSSP to ensure compliance with State laws and regulations
governing institutional and student eligibility. A schedule of program reviews for
the current year has been established consistent with current staffing levels.
FINDING
3. Scholarship and Grant Awards
MHEAA's internal control structure over its student information database did not
reasonably ensure that student data used to determine eligibility for the State-
funded Competitive Scholarship and Tuition Grant Programs was accurate and
complete. Also, MHEAA's internal control structure over its automated payment
system did not reasonably ensure that awards were provided only to eligible
recipients.
MHEAA awarded over $248 million to 177,603 scholarship and grant recipients for
the three fiscal years ended September 30, 1997. Our review of the data
contained on the student information database for these recipients disclosed:
a. MHEAA did not update its student information database for revisions to
student family financial information. These revisions would have changed the
calculated family financial contribution for 872 students who received
approximately $255,000 more than their financial need. Of the 872 students,
306 students, whose revised calculated family financial contribution resulted
in the students having no financial need, received approximately $186,000 in
scholarships and grants. MHEAA did not revise the database for changes in
financial need for 18 of 306 students. Such revisions would have indicated
overawards to these students.
b. MHEAA did not update the student information database for revisions to
students' enrollment status which resulted in errors in students' unmet
financial need. Unmet financial need is the amount of a student's financial
need that remains after scholarship and/or grant awards. Colleges and
universities use student unmet financial need as contained in the student
information database in awarding other financial aid to the student. Our
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calculation of unmet financial need disclosed different amounts than those
contained in the student information database for 7 (12%) of 60 students
tested. These 7 students' unmet financial need would have ranged from $329
to $1,810 higher if MHEAA had updated its database for the revisions to the
student's enrollment status.
c. The state of residency information contained in the database was blank for 74
students. Section 390.974 of the Michigan Compiled Laws requires that
students be Michigan residents to be eligible to receive a scholarship or a
grant. Developing database controls to deny the acceptance of incomplete
data into the database would help ensure that only Michigan residents are
eligible to receive scholarships or grants.
d. MHEAA had not followed up on 211 students whose age as contained in the
database was 15 or less. Of these students, 54 were reported to have been
born during, or after, the year in which the students applied for financial aid.
Although age is not a factor for determining eligibility for an award, Section
388.1621(b) of the Michigan Compiled Laws prohibits a student from receiving
a grant or scholarship to attend a postsecondary institution when
simultaneously enrolled in high school. Following up on students whose age
indicates possible high school enrollment would help ensure MHEAA does not
provide grants or scholarships to students enrolled in high school.
e. MHEAA's automated payment system did not contain the necessary controls
to limit student awards to the maximum specified by Sections 390.993 and
390.975 of the Michigan Compiled Laws. As a result, MHEAA provided
awards to 17 students in excess of the cumulative number of awards allowed.
Developing a payment system control to limit the cumulative number of
awards that a student receives would help MHEAA ensure that awards are in
compliance with the Michigan Compiled Laws.
Enhancing controls over the student information database to include editing the
information would help ensure complete and accurate student data from which
staff can determine eligibility for scholarships and grants. Such enhancements
would also help ensure that MHEAA, colleges, and universities provide accurate
awards to eligible students. State-funded financial aid is limited; therefore, by
27-310-97 23
excluding ineligible students, MHEAA could provide scholarships and grants to
more eligible students who would not have received an award because of a lack of
funds.
We reported this same condition in our prior audit. MHEAA responded that it
agreed in concept with our recommendation; however, MHEAA did not take
additional steps to reduce awards to ineligible students. MHEAA responded that,
because external factors beyond its control (e.g., the U.S. Department of
Education, colleges and universities, and students) impact the completeness and
accuracy of information used to determine student eligibility and scholarship and
grant awards, an enhanced control structure will not completely ensure accurate
receipt or timely processing of information in all cases.
RECOMMENDATIONS
WE AGAIN RECOMMEND THAT MHEAA ENHANCE ITS CONTROLS TO HELP
ENSURE THAT STUDENT DATA CONTAINED IN ITS STUDENT INFORMATION
DATABASE IS ACCURATE AND COMPLETE.
We also recommend that MHEAA develop controls over its automated payment
system to help ensure that awards are provided only to eligible recipients.
AGENCY PRELIMINARY RESPONSE
MHEAA agrees with both recommendations. Also, MHEAA agrees that the
database needs to be enhanced to provide accurate and complete information,
and it will be reviewing the viability of the current system within the next six
months. This review may well result in changing the current platform from a
mainframe to a client server structure. Whether the system is restructured or
rehabilitated, MHEAA will work closely with the Department's Information
Technology Services Division to ensure enhanced functionality in order to improve
compliance as well as service to all MHEAA constituents.
27-310-97 24
FINDING
4. Loan Discharge Controls
MHEAA had not established an internal control structure sufficient to ensure the
proper discharge of defaulted loans purchased from lenders. As a result, MHEAA
was unable to demonstrate that it approved all loans discharged.
MHEAA continuously purchases defaulted loans from lenders as part of its
guaranty responsibilities. For the fiscal year ended September 30, 1997, MHEAA
acquired over 14,800 defaulted loans totaling approximately $50.4 million. Upon
the compilation of sufficient documentation, MHEAA approved the discharge of
loans for various reasons, such as bankruptcy, disability, and death of the
borrowers. MHEAA did not maintain records to document the actual number of
defaulted loans discharged.
During our review, we noted the following weaknesses in the internal control
structure over discharged loans:
a. One individual responsible for approving the discharge of loans also had
computer system access that enabled the individual to record the discharge
on MHEAA's computer database.
b. MHEAA did not generate a report of all loans discharged from the computer
database to periodically reconcile with records of loan discharge approvals.
Therefore, MHEAA was unable to document that it approved all loans
discharged.
The objectives of an internal control structure are to provide management with
reasonable, but not absolute, assurance that assets are safeguarded against loss
from unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization and recorded properly.
Developing and implementing defaulted loan discharge controls would help
ensure, and allow MHEAA to demonstrate, that only properly approved defaulted
loans are discharged from MHEAA's computer database.
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RECOMMENDATION
We recommend that MHEAA establish an internal control structure sufficient to
ensure the proper discharge of defaulted loans purchased from lenders.
AGENCY PRELIMINARY RESPONSE
MHEAA agrees with this recommendation. The employee responsible for
approving the discharge of loans is no longer permitted computer system access
to record discharged loans on MHEAA's computer database. In addition, MHEAA
will reconcile records of loan discharge approvals with the computer database
reports for loan discharges to confirm that the number of discharged loans
matches the number of loan discharge approvals.
FINDING
5. Refund Policy
MHEAA had not established a policy that requires State-funded financial aid
recipients who were determined to be ineligible subsequent to receiving financial
aid to refund the amounts received.
Revisions to student financial aid program eligibility occur continuously as
MHEAA, colleges, and universities verify eligibility data provided by students.
These revisions can reduce or eliminate the student's eligibility for financial aid
already received. For the three fiscal years ended September 30, 1997, MHEAA
terminated the financial aid program eligibility for more than 300 students because
of revisions to their eligibility data. However, MHEAA provided these students
more than $185,000 in financial aid prior to terminating future award payments.
MHEAA did not require the students to refund the financial aid for which they were
ineligible because its policy was only to cancel future aid payments.
The application for federal student financial aid states that students who receive
federal aid based on incorrect information will be required to pay it back. The
application also states that if students provide false or misleading information on
the application, they may be fined $10,000 and/or sent to prison.
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Establishing a refund policy with a penalty for obtaining financial aid based on
inaccurate information would provide a program deterrent to those students who
knowingly provide inaccurate information. Also, a refund policy would enable
MHEAA to provide refunded amounts to other eligible students.
RECOMMENDATION
We recommend that MHEAA establish a policy that requires State-funded financial
aid recipients who are determined to be ineligible subsequent to receiving financial
aid to refund the amounts received.
AGENCY PRELIMINARY RESPONSE
MHEAA will begin a review process of related federal and State regulations and
policy in order to determine the most appropriate way to implement this
recommendation. There are suggested changes forthcoming within the
Reauthorization of the Higher Education Act of 1965, as amended, that may
change the federal refund policy, which may, in turn, affect how MHEAA will want
to proceed in developing policy.
COMPLIANCE
COMMENT
Audit Objective: To assess MHEAA's and MHESLA's compliance with State and
federal laws and regulations that could have a material effect on the administration of
their programs.
Conclusion: We concluded that MHEAA and MHESLA generally operated their
programs in compliance with State and federal laws and regulations that could have a
material effect on the administration of their programs. However, we noted reportable
conditions involving contractor loan collection procedure compliance and annual report
timeliness.
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FINDING
6. Contractor Loan Collection Procedure Compliance
MHESLA did not always follow required procedures when monitoring the
contractor responsible for collecting delinquent loans in the Michigan Alternative
Student Loan (MI-LOAN) Program to ensure compliance with collection
requirements contained in the service contract.
MHESLA contracted with a loan servicing agency to perform procedures designed
to collect delinquent student loans. Activities specified in the service contract
included telephone calls and written correspondence at specific time intervals. MI-
LOAN procedures required MHESLA to monitor contractor compliance with the
collection activities by reviewing monthly collection activity as shown on the loan
account history for all 60-day delinquent loan accounts. MHESLA documented its
review by completing a form designed to identify the lack of collection activity
compliance. If the contractor did not maintain certain levels of compliance with the
collection requirements, MHESLA was supposed to communicate the instances of
noncompliance to the contractor.
Our review of the loan account records for a random sample of 8 of the 60
students who had delinquent loans, as of June 30, 1997, disclosed that MHESLA
did not properly monitor contractor compliance with collection activities and/or
communicate the instances of noncompliance to the contractor:
a. MHESLA failed to identify and document at least one collection procedure
performed by the contractor for all of the loan accounts reviewed. Failing to
identify and document all contractor-performed collection procedures may
lead MHESLA to incorrectly conclude that the contractor did not comply with
established collection procedures.
b. We identified 3 instances in which the contractor failed to make the required
"25 day" telephone contacts* or attempted contacts for 3 of the 8 student loan
accounts reviewed. For each of the accounts, the contractor failed to perform
two or more required contacts. For these 3 accounts, MI-LOAN procedures
* See glossary on page 30 for definition.
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required that MHESLA communicate the instances of noncompliance to the
contractor. MHESLA did not identify or document these instances of
noncompliance during its review of the loan accounts; therefore, it did not
communicate the instances of noncompliance to the contractor.
Monitoring contractor compliance with procedures designed to increase loan
repayments would help ensure that MHESLA obtains the maximum benefit for
funds expended and provide an additional basis for evaluating the contractor for
future services.
RECOMMENDATION
We recommend that MHESLA follow required procedures when monitoring the
contractor responsible for collecting delinquent loans in the MI-LOAN Program to
ensure compliance with collection requirements contained in the service contract.
AGENCY PRELIMINARY RESPONSE
MHESLA agrees with the recommendation and has taken steps to comply. To
resolve the issues noted in the finding, staff have been retrained.
FINDING
7. Annual Report Timeliness
MHEAA had not submitted an annual report on its operations to the Governor and
Legislature for each of the three fiscal years ended September 30, 1996 as
required by the Michigan Compiled Laws. Also, MHESLA had not prepared an
annual report of its operations for the same fiscal years in a timely manner.
Section 390.960 of the Michigan Compiled Laws requires MHEAA to submit an
annual report to the Governor and Legislature within 60 days after the Legislature
convenes.
Although not required by statute, MHESLA has presented the results of its
operations in a combined annual report with MHEAA operations since MHESLA's
first full year of operations in fiscal year 1976-77. MHESLA management has
stated that reporting on the operations of MHESLA is important because of the
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significance of its programs in complimenting MHEAA programs. For example, for
the three fiscal years ended September 30, 1997, MHESLA provided more than
17,500 loans, valued at approximately $93.5 million, to student borrowers through
its Michigan Direct Loan and MI-LOAN programs. Also, for the same fiscal years,
MHESLA acquired over 113,000 loans from Michigan lenders valued at
approximately $286.0 million. In addition, reporting on MHEAA and MHESLA
operations provides complete information on the student financial aid provided to
Michigan students and their parents.
As of September 30, 1997 (more than 6 months after MHEAA's required annual
report submission date), MHEAA had not submitted, and MHESLA had not
prepared, an annual report of operations for the fiscal year ended September 30,
1996. MHEAA and MHESLA submitted annual reports of operations for the fiscal
years ended September 30, 1995 and September 30, 1994 in November 1996 and
September 1995, respectively. These reports were submitted 8 months and 6
months, respectively, after MHEAA's required annual report submission date.
Submitting an annual report of MHEAA operations in compliance with Section
390.960 of the Michigan Compiled Laws concurrently with an annual report of
MHESLA operations would provide interested users the information on a timely
basis.
RECOMMENDATIONS
We recommend that MHEAA submit an annual report on its operations to the
Governor and Legislature within 60 days after the Legislature convenes as
required by Section 390.960 of the Michigan Compiled Laws.
We also recommend that MHESLA prepare an annual report of its operations in a
timely manner.
AGENCY PRELIMINARY RESPONSE
The Authorities agree with the recommendations that both MHEAA and MHESLA
prepare and submit an annual report of operations in a timely manner and
pursuant to Section 390.960 of the Michigan Compiled Laws. Staff have taken
steps to streamline the report, reducing duplicate data elements that have
contributed to the lengthy process of compiling the report.
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Glossary of Acronyms and Terms
Authorities MHEAA and MHESLA.
continuous quality
improvement processA management system which focuses on the needs and
expectations of internal and external customers and is
designed to improve how products and services are
provided.
effectiveness Program success in achieving mission and goals.
efficiency Achieving the most outputs and outcomes practical for the
amount of resources applied or minimizing the amount of
resources required to attain a certain level of outcomes or
outputs.
financial audit An audit that is designed to provide reasonable assurance
about whether the financial statements/schedules of an
audited entity are fairly presented in conformity with
generally accepted accounting principles.
fiscal year October 1 through September 30 for the State.
full-time equated Equating to 2,080 hours of continuous service.
goals The agency's intended outcomes or impacts for a program to
accomplish its mission.
internal control
structureThe management control environment, management
information system, and control policies and procedures
established by management to provide reasonable
assurance that goals are met; that resources are used in
compliance with laws and regulations; and that valid and
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reliable performance related information is obtained and
reported.
MGA Office of the Michigan Guaranty Agency.
MHEAA Michigan Higher Education Assistance Authority.
MHESLA Michigan Higher Education Student Loan Authority.
MI-LOAN Program Michigan Alternative Student Loan Program.
objectives Specific outputs a program seeks to perform and/or inputs a
program seeks to apply in its efforts to achieve its goals.
OFA Office of Fiscal Affairs.
OSG Office of Scholarships and Grants.
OSSP Office of Support Services and Programs.
outcomes The actual impacts of the program. Outcomes should
positively impact the purpose for which the program was
established.
outputs The products or services produced by the program. The
program assumes that producing its outputs will result in
favorable program outcomes.
performance audit An economy and efficiency audit or a program audit that is
designed to provide an independent assessment of the
performance of a governmental entity, program, activity, or
function to improve public accountability and to facilitate
decision making by parties responsible for overseeing or
initiating corrective action.
32oag
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performance
indicatorsInformation of a quantitative or qualitative nature indicating
program outcomes, outputs, or inputs. Performance
indicators are typically used to assess achievement of goals
and/or objectives.
performance
standardsA desired level of output or outcome as identified in statutes,
regulations, contracts, management goals, industry
practices, peer groups, or historical performance.
reportable condition A matter coming to the auditor's attention that, in his/her
judgment, should be communicated because it represents
either an opportunity for improvement or a significant
deficiency in management's ability to operate a program in
an effective and efficient manner.
Single Audit A financial audit performed in accordance with the Single
Audit Act of 1984 that is designed to meet the needs of all
federal grantor agencies and other financial report users. A
Single Audit is a financial audit which requires additional
study and evaluation of the internal control structure and
testing of compliance with laws and regulations relevant to
federal assistance programs.
SLA Office of Student Loan Authority Programs.
SLS Supplemental Loans for Students.
"25 day"
telephone contactTelephone contact required 25 days after contractor
collection efforts begin.
